Case Study on "Inventory Management a in an Importer Industry"

Case Study 40 pages (12443 words) Sources: 40

[EXCERPT] . . . .

Inventory Management

The raw materials, goods in process, and finished products represent different forms of inventory. Every stage of production of commodity represents money tied up until the inventory finds its way out of the premises as purchased product. The merchant stock, for instance, contribute to profits only when by selling them money goes into the cash register. Inventory management is instrumental in the determination of what are on hand, where it is used and how much finished products results. An efficient inventory management involves watching over constant flow of units in and out of already existing inventory. The business entity will control the transfer of units, which in the end makes the inventory remain at manageable levels.

Saxena (2009) attests to the significance of inventory system in collecting and processing large quantity of data. He believes that introduction of computer in the 1950s is responsible for reduction of cost of handling data which was quite high in the pre-computer days (Saxena, 2009, p. 1). Consequently, there was renewed interest in the inventory theory, which marked the beginning of an era characterized by large-scale inventory systems. He defines inventory as idle resources of any kind that have potential economic value and always considered as locked up capital. They are the goods as well as materials held available in stock by the business entity.

Conversely, he considers inventory management as the process of managing stocks of finished products, semi-finished products and raw materials (Saxena, 2009, p. 2). Inventory management is a continuous process with various kinds of solutions available. The organization must employ qualified staff with relevant knowledge, skills and specialization in managing inventories. The whole inventory management exercise begins immediately the production commences which involves ordering raw materials, production of partially finished products and any other important material from the supplier. A competent management of inventory also aims at controlling the costs that are associated with the inventory from the perspective of total value of the commodities and the tax burden generated by the cumulative value of the inventory (Saxena, 2009, p. 3).

Three key aspects of inventory the business enterprise must consider when managing its inventories include time, calculating buffer stock and keeping accurate records of finished products ready for shipment. It is imperative for the organization to understand the duration the supplier would take to process an order and execute delivery. Buffer stock refers to extra units beyond the minimum number necessary for maintaining production levels (Saxena, 2009, p. 3). The manager of the firm may resort to keeping one or two additional units of an electric device for emergency purpose or in the event that a unit already installed unit proves to be defective. Inventory is hence a stock of anything necessary for the success of a business venture. Proper management of the stocks would ensure maximum profits.

Successful Management of Inventory

Successful management of the inventory will guarantee increase in turn over volume and profit-maximization. This involves balancing the inventory costs with benefits associated with the inventory. The manager of the organization should consider the direct costs of insurance, storage, taxes and cost of money tied up in the inventory. Other strategies that are fundamental for effective inventory management include maintenance of a wide assortment of stock, increasing inventory turnover, keeping the stock low without sacrificing performance or service, obtaining lower prices by purchasing in large volumes and possessing adequate inventory. Inventory management plays a vital task of keeping the correct balance, the controller being inventory manager, stock planner or logistics controller. Changes in market and financial forces along with the amount and type of stock control vary with the demand. Successful inventory manager will ensure keeping of the balance right because stock control is typically a dynamic activity.

The Goals of the Inventory

Minimization of inventory investment while still meeting the functional requirements is the primary goal of inventory. According to John Toomey (2000), an improvement in dependability of the process as well as forecasting allow for reductions in inventory with positive maintenance of the most desirable levels of customer service and manufacturing efficiency (Toomey, 2000, p. 45). Another goal of inventory management is to reduce work in progress, which translates into a reduction of lead-time thereby leading to greater flexibility of manufacturing. Inventory management would ensure safety of inventory. Keeping the inventory in a safe area with assurance of protection against theft or vandalism is mandatory for success of the organization.

Depending on the magnitude of the organization, the management could use surveillance equipment, guards or alarm system to safeguard the business premises including the inventory (Toomey, 2000, p. 45). The management and other employees who can access the inventory should handle it carefully to avoid breakage as broken or lost inventory causes the business to suffer huge losses financially. Other goals include effective process flow best accomplished through setup reduction, simplification of bill material, and operation synchronization (Toomey, 2000, p. 45).

A concerted and continuing inventory management is foreseeable in order to attain these goals. A properly maintained inventory will boost confidence of the organization in crucial decision-making such as purchasing of raw materials and semi-finished products. Inventory management will also foster determination of selling price of goods and services a business entity specializes in as well as simplifying calculation of profits resulting from sale of its merchandise. Inventories allow customers to make choice of commodities to buy by comparing the prices of various organizations producing the same product (Toomey, 2000, p. 45).

Although organizations have varied costs of production, the customer will be in a position to make good choices by evaluating the advantages of commodities produced by one company over the other, mainly in terms of quality, quantity, pricing, accessibility and availability. The inventories will also allow the business entity to track sales of its manufactured products. One of the most important reasons for inventory management is to track and review the company sales on regular basis.

The managers of the corporation will identify items that do not sell and those in demand through habitual review. The data derived from the review would be important in controlling quantity of items and time to order them. Incidentally, the firm should always avoid excess stock but at the same time ensuring the highly sort out commodities are available throughout the trading period. The organization would encourage inventory management to ensure the accuracy of inventory systems (Muller, 2011, p. 2). The organization has a tricky responsibility to ensure no incorrect information displays in the inventory databases as it could translate to unnecessary speculation, loss of trust and confidence in the organization among its esteemed customers, leading to some customers shifting loyalty to a competitor. Inventory management would also eliminate excess products. The organization can keep dead stock off the shelves courtesy of successful management. The business is under no obligation to keep products that do not sell since they drain company's limited resources. The enterprise may return stock that is not selling or simply offering products at lowered prices to another company (Muller, 2011, p. 2). The inventory cost fall under ordering cost and holding costs. Ordering costs is independent of actual value of the goods. Holding costs include the cost of capital tied in the inventory, which is the opportunity cost of money. Other costs include storage cost (warehousing), cost of handling the equipment and stock keeping staff. The inventory would help an organization that is suffering from poor cash flow to redeem itself thereby boosting customer confidence in the management of the entity (Muller, 2011, p. 2).

ABC Analysis

The analysis is a management tool for categorizing inventory. The inventory consists of many different parts. Each part exhibits a vastly different attributes. The glaring attributes distinguish one part from the other. Hence, every part requires a relatively specialized management effort and control. ABC analysis is applicable in areas where parts of the inventory have clear differences and each part requires treatment very different from the rest of the structure (Gopalakrishnan & Sundaresan, 2003). The primary target of ABC analysis is the existing groupings of various parts that facilitate appropriate control, effective progresses and proper management. A typical result of ABC analysis indicates that the researcher is likely to find that over 80% of the parts of the inventory representing a meager 20% of the value. According to Gopalakrishnan and Sundaresan (2003), ABC analysis is a management tool that enables top management put much effort where results will be greatest. The technique popularly referred to as Always Better Control, has universal application in many areas of human endeavor (Gopalakrishnan & Sundaresan, 2003).

The outcome would be three distinctive groups of parts with differing attributes. The researcher will configure the processes and workflow around the groups through cycle count processes, procurement and sourcing processes and material handling processes. Overall, ABC analysis is a materials management process. Although less complicated to carry out, it requires accurate and historic data. ABC analysis refers to systematic analysis of range of items with different levels of significance (Gopalakrishnan… READ MORE

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